American gets dealt into United merger mix

John SchmeltzerTribune Staff Writer

In a furious bid to save their faltering acquisition of US Airways, officials of United Airlines have agreed to sell to their biggest competitor huge chunks of the East Coast airline for a fraction of their value.

The cornerstone of the deal calls for United and Ft. Worth, Texas-based American Airlines, the world's two biggest airlines, to operate US Airways' lucrative East Coast Shuttle as a joint venture, sources close to the negotiations said Sunday. The shuttle provides hourly service between New York's LaGuardia Airport and Boston's Logan International and Washington's Ronald Reagan National.

The deal, to be announced Wednesday, would allow American to greatly expand its East Coast network and would have a "phenomenal impact" on American's corporate business in the Northeast, the sources said.

In addition, the Washington Post reported today that American plans to announce this week that it is purchasing troubled St. Louis-based Trans World Airlines. As part of the deal, TWA would file for Chapter 11 bankruptcy protection and American would buy the airline's assets out of bankruptcy and would preserve the jobs of the airline's 20,000 employees. The acquisition would make American comparable in size to the combined United and US Airways.

American, which would receive assets from United valued at more than $2 billion in the US Airways deal, would pay "significantly less" than $1 billion, sources said.

The American-United deal would be contingent on approval by the antitrust division of the U.S. Department of Justice, which until this point has told United that its $11.6 billion acquisition of US Airways was virtually dead unless United agreed to make significant divestitures.

In addition to the joint venture, United has agreed to hand over to American about 90 of US Airways' jets, dozens of gates at airports up and down the East Coast and several dozen landing and takeoff positions at LaGuardia and Reagan National. Those landing and takeoff positions alone are valued in the millions of dollars.

In return, American has agreed to launch competitive service against United on routes between Philadelphia and Los Angeles and Denver; between Charlotte, N.C., and Chicago; and between Pittsburgh and Reagan National. That was something American has been planning to do anyway. In addition, American is expected to expand its current service between Chicago and Reagan National, which United currently dominates with hourly flights.

And American has agreed to buy a 49 percent stake in the new regional airline, DC Air, that Robert Johnson, the former founder and head of Black Entertainment Television Inc., is to launch if the US Airways and United merger is approved. Under terms of the merger, United would spin off most of US Airways' routes at National to 43 East Coast cities to Johnson for $141 million.

For its part, American would lease to Johnson 11 100-seat jets complete with crews. United originally had agreed to lease the planes to Johnson. But United's flight attendants, citing a clause in their contract that prohibits United from forcing its members to work for another carrier, said they would not agree to the deal unless they received raises of as much as 30 percent.

American would pay less than $10 million for the 49 percent stake in Johnson's DC Air, according to the spokesmen for the negotiators.

United and American both declined to comment. Efforts to reach Johnson were unsuccessful.

The deals with American come less than two weeks after United and federal regulators agreed to extend until April 2 the deadline for a decision on the merger.

American was one of three airlines vying for pieces of US Airways. Both Continental and Delta had expressed interest in parts that United might be forced to divest.

In an effort in October to block shareholder approval of the merger, Continental offered United $215 million for DC Air, a 50 percent premium over what Johnson is to pay.

If the merger is approved, the deals strengthen both United and American. But American stands to benefit more because it greatly enhances the airline's stature among business fliers.

"American's network is going to immediately get much stronger at a fraction of the cost and with none of the labor issues that United is being forced to deal with," a spokesman said.

The proposed merger prompted United's pilots, mechanics, flight attendants and agents to demand huge raises for their support. While the pilots have reached agreement on a contract, the other employee groups are still embroiled in contentious talks.

Perhaps the most difficult part of the agreement is what negotiators say is the cornerstonethe joint venture for operating the Northeast shuttle.

Under the plans being developed, shuttle passengers would be able to buy tickets from either United or American that would be valid on either carrier's planes. United likely would fly the shuttle flights to Washington and Boston on the even hour while American would fly the shuttle flights on the odd hour.

And the flights would depart from adjacent gates rather than from the United concourse or the American concourse at the three airports.

"There will be some way that the revenue is recognized so each carrier gets paid for passengers they carry," said a spokesman for the negotiators.

In addition, both carriers would market their shuttle flights separately. The spokesmen said United would market its "economy plus" plan, which provides more room between the first 6 to 11 rows in coach, while American would pitch its more room throughout coach.

United's proposal to acquire US Airways has been under fire virtually from the day it was announced in May. Airlines warned that it would set in motion a series of mergers after which only three major carriers would remain.